When selling any Long Term Capital Asset, the Gains are usually huge and are taxed @ 20%. The Resultant Figure to be paid as Tax usually comes out to be a huge amount liable to be paid as Long Term Capital Gain Tax.

However, the Govt. of India has given the option of claiming exemption from paying this Capital Gains Tax if the taxpayer reinvests the amount in certain specified forms of Investment and can thereby save the Long Term Capital Gain Tax as explained below.

Section 54: Old Asset: Residential Property, New Asset: Residential Property

Under Section 54 – Any Long Term Capital Gain, arising to an Individual or HUF, from the Sale of a Residential Property (whether Self-Occupied or on Rent) shall be exempt to the extent such capital gains is invested in the

1. Purchase of another Residential Property within 1 year before or 2 years after the transfer of the Property sold and/or

2. Construction of Residential House Property within 3 years from the date of transfer/sale of property

If the new property is sold within 3 years from its acquisition, then, to compute the capital gains on this transfer, the cost of acquisition of this house property shall be reduced by the amount of capital gain exemption under section 54 earlier. The capital gain arising from this transfer will always be a short term capital gain.

Quantum of Deduction under Section 54

Capital Gains shall be exempt to the extent it is invested in the purchase and/or construction of another house i.e.

1. If the Capital Gains amount is equal to or less than the cost of the new house, then the entire capital gain shall be exempt.

2. If the amount of Capital Gain is greater than the cost of the new house, then the cost of the new house shall be allowed as an exemption.

No. of Houses which can be purchased for claiming Section 54 Exemption

1. The Capital Gains Exemption is allowed only if the Capital Gains exemption is invested in the construction/purchase of 1 residential house. Irrespective of the no. of houses already owned by the person, if he invests the capital gain in the construction/purchase of a single residential house, capital gains exemption can be claimed. [Introduced vide Finance Act 2014]

2. As an exception to the above rule, in cases where the amount of Capital Gains does not exceed Rs. 2 Crores, the capital gains exemption would be allowed even if the investment is made in the purchase/construction of 2 residential houses. However, this exemption of purchasing 2 residential houses can be claimed only once, and this exemption, once claimed, cannot be claimed in again in any other year. For all other years, investment should be made in the construction/ purchase of 1 residential house only—[Introduced vide Finance Act 2019].

Although, as per Section 54, the assessee is given 2 years to purchase the house property or 3 years for the construction of the house property, the capital gains on the transfer of the original house property is taxable in the year in which it was sold. The Income Tax Return of that year must be submitted in the relevant assessment year on or before the specified due date for filing the Income Tax Return. Hence, the assessee will have to decide for the purchase/construction of the house property till the date of furnishing of the income tax return; otherwise, the capital gain would become taxable.

To avoid the above situation, the Income Tax Act specifies an alternative in deposit under the Capital Gains Account Scheme.

The Amount of Capital Gain which the Assessee does not utilise for the purchase or construction of the new house before the date of furnishing of the Income Tax Return should be deposited by him under the Capital Gains Account Scheme before the due date of furnishing the return. The proof of such a deposit shall be attached with the Income Tax Return. In this case, the amount already utilised by the assessee for the purchase/construction of the new house shall be eligible for exemption.

In case the assessee deposits the amount in the Capital Gains Account Scheme but does not utilise the amount deposited for the purchase or construction of a residential house within the specified period, the amount not so utilised shall be charged as Capital Gains of the year in which 3 years is completed from the date of sale of the Original Asset. It will be a long term capital gain of that financial year.

Section 54EC: Old Asset: Any Asset, New Asset: Specified Bonds

Gains arising from the transfer of any long term capital asset are exempt under section 54EC if the assessee has within 6 months after the due date of such transfer invested the capital gain in long term specified bonds as notified by the Govt. for a minimum period of 3 years.

In a case where the long term specified asset is transferred or converted into money at any time within 3 years from the date of its acquisition, the amount of capital gains exempt u/s 54EC shall be deemed to be long term capital gain of the previous year in which the long term specified asset is transferred or converted into money.

If the Assessee even takes a loan or advance on the security of such long term specified asset, he shall be deemed to have converted such long time specified asset into money on the date on which such loan or advance is taken.

REC and NHAI usually issue these specified binds, and the Interest Rate offered is approx. 5.75%. Tax on the Interest earned is also liable to be paid as the Interest is not tax-free.

Budget 2018 Amendment: With effect from Financial Year 2018-19, the benefit of Section 54EC would only be available on the sale of Land or Building (whether Residential or Non-Residential). Earlier it was available for all assets, but now it would only be applicable for Land or Building.

Moreover, from Financial Year 2018-19 onwards, these bonds would be required to be held for minimum 5 years.

Quantum of Deduction under Section 54EC

1. Capital Gains shall be exempt to the extent it is invested in the long term specified assets (subject to a maximum limit of Rs. 50 Lakhs) within 6 months from the date of such transfer.
2. Budget 2014 has also introduced an amendment to Section 54EC. From FY 14-15, i.e. AY 15-16 onwards, the investment made by an assessee in the long term specified asset, out of capital gains arising from the transfer of one or more original assets or assets, are transferred and in the subsequent financial year does not exceed Rs. 50 Lakhs.

Section 54F: Old Asset: Any Asset, New Asset: Residential House

Any Gain arising to an individual or HUF from the sale of any Long Term Asset other than Residential Property shall be exempt in full if the entire net sales consideration is invested in

1. Purchase of one residential house within 1 year before or 2 years after the date of transfer of such an asset or in
2. Construction of 1 Residential House within 3 years after the date of such transfer

In case the wholesale consideration is not invested, and only a part of the sale consideration is invested, the exemption shall be allowed proportionately i.e.

Amount Exempt = Capital Gain X Amount Invested

                                                         Net Sale Consideration

Exemption under Section 54F is not available in the following cases

The above exemption would not be available if any of the below-mentioned conditions are satisfied:-

1. The assessee does not own more than 1 Residential House Property on the date of transfer of such asset exclusive of the one he has bought for claiming exemption under section 54F.
2. The assessee purchases any residential house other than the new asset within 1 year of the transfer of the old asset.
3. The assessee constructs any residential house other than the new asset within a period of 3 years after the date of the old asset.

Budget 2014 has also introduced an amendment to Section 54F from FY 2014-14, i.e. AY 15-16. As per this amendment, the exemption is available if the investment is made in 1 residential house situated in India.

Exemption under Section 54F will not be allowed if an investment is made in 2 houses. The option to invest in 2 houses is available once in a lifetime in Section 54 but not in Section 54F.

The Assessee also has the option of depositing this amount in the Capital Gains Account Scheme as explained in Section 54 above before the due date of furnishing the Income Tax Return.